CSI INVESTMENT MANAGEMENT LTD v. KE JUN XIANG

HCA1647/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1647 OF 2004

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J U D G M E N T

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1. The defendant appeals against the decision of Master Au Yeung dated 2 August 2005, granting summary judgment against him for $1,600,000 with interest and costs.

2. This is a case of dishonoured cheques.  The defendant drew four cheques in favour of the plaintiff for a total of $1,600,000, dated respectively 30 July, 30 September and 30 November 2003 and 31 January 2004.  The first two cheques were presented on 14 October 2003 and dishonoured.  The third and fourth were presented on 3 June 2004 and dishonoured.

Background

3. The plaintiff, CSI Investment Management Ltd (“CSI”) is an investment advisor.  CIL Holdings Ltd (“CIL”) is a listed public company incorporated in Bermuda, and the defendant, Mr Ke, is its director and major shareholder.  CSI entered into a licence agreement with CIL to let CIL use part of its office premises for the period from 1 September 2001 to 30 September 2003, i.e. for 25 months, at a licence fee of $100,000 per month.  Those licence fees were never paid.  It is not in dispute that CIL now owes CSI $2,500,000 in licence fees plus a further $500,000; there is a dispute as to what this figure represents, and I will deal with that below.

4. Because CIL did not pay the licence fees, CSI approached Mr Ke, and he gave CSI a cheque for $1,000,000 dated 30 March 2003.  He asked for, and CSI gave him some extra time to pay, but the cheque was dishonoured in May 2003.

5. CSI then on 10 June 2003 issued proceedings against CIL in HCA2114/2003 for $2,000,000, being the licence fees for the period from 30 September 2001 to 30 April 2003.  Mr Ke drew the four cheques in favour of CSI and delivered them on 17 July 2003, and on the same day CSI discontinued the action.

6. Also on 17 July 2003, Mr Ke and his fellow director of CIL, Mr Peter Ho, each entered into a Deed of Guarantee (“the Deed”) in favour of CSL.  In Mr Ke’s deed he recited that he was a director of CIL, that CIL owed CSI $2,000,000 (“the Debt”) and that prior to the execution of the Deed CSI had commenced HCA2114/2003 and that he covenanted to repay to CSI the Debt by issuing the four post-dated cheques, copies of which were appended to the Deed.  The Deed expressed that in consideration of CSI having agreed at his request to discontinue proceedings, Mr Ke guaranteed payment of the Debt, or such part as CSI did not pay, with costs on a full indemnity basis.

7. In December 2003 there were negotiations between CSI and CIL and following on those negotiations CIL issued, in favour of CSI, 15 promissory notes of $200,000 each, i.e. to a total value of $3,000,000.  The promissory notes each expressed that CIL promised to pay $200,000 with interest of 6% p.a. on 30 June 2004 :

“… in consideration of your consultancy services rendered and provision of office premises with facilities and resources for the agreed period of 1 September 2001 to 30 September 2003”

8. However, it is common ground that none of these promissory notes has been met.  There are liquidation proceedings afoot against CIL in respect of 14 of the unpaid notes, i.e. the balance over and above the $1,600,000 for which CSI obtained summary judgment against Mr Ke.

The case on the pleadings

9. There is no dispute that Mr Ke drew the cheques and that they were dishonoured, or that the cheques were drawn in consideration of CSI’s discontinuance of HCA2114/2003.

10. In the original Defence and Counterclaim, Mr Ke pleaded that the original agreement between CSI and CIL was for a consultancy plus a licence of office space for a total of $3,000,000; that CSI demanded settlement of this sum and issued proceedings for it; and that the signing of the cheques was procured by threats on the part of CSL that unless CIL offered an interim security arrangement, it would proceed with the action and wind up CIL, i.e. by duress.  He also pleaded that the cheques were delivered on the express or implied condition that they were not to be presented until further arrangements were made between CSI and CIL.  Finally, he pleaded that on 1 December, CSI compromised with CIL and accepted the promissory notes as settlement of CIL’s debts and as discharge of Mr Ke’s cheques.

11. In an Amended Defence and Counterclaim, filed along with further affidavit evidence since the hearing before the Master, Mr Ke pleads that the original agreement was for a licence of office space at $100,000 per month, and this is what CSI sued CIL for.  That is factually correct, in that the claim was for $2,000,000.  However he also now pleads that CIL agreed to accept the promissory notes as settlement of the licence fee and as discharge of the cheques issued by Mr Ke.

12. The difference between the total outstanding licence fees of $2,000,000 and the total of the promissory notes is explained in Mr Ke’s latest affirmation as a “sweetener” given by CIL for CSI to accept the settlement.

Issues

13. In order to obtain leave to defend, the defendant must pass the threshold onus to show that there is a triable issue.  See Murjani v. Bank of India [1990] 1 HKLR 586 (CA).

14. There are three defences here; the first, that the cheques were delivered on the express or implied condition that they were not to be presented pending further arrangements between CSI and CIL; the second, duress; and the third, settlement.

Express or implied condition

15. This was not really pursued in argument; counsel said that he did not need to rely on it, and there was no evidence in support of it.  I would go further.  Insofar as there is evidence of it, i.e. in Mr Ke’s affirmation, it is extrinsic evidence to contradict the express terms of the cheques as to payment on the due dates, and as such it is inadmissible.  See Hoven International Ltd v. Mass Resources Development Ltd & Anor, HCA415/1995; Bank of China (HK) Ltd v. Wu Ming Fat Simon, HCA590/2001.  In any event, even if the evidence were admissible, it is unbelievable in the light of the terms of the Deed of Settlement.  I deal with this point further below.  There is, therefore, nothing in this limb of the defence.

Duress

16. Mr Ke says that CSI put an extra lock on the door of the part of its offices used by CIL, and threatened to sue CIL; and that was what made him issue the first cheque for $1,000,000.  When that was dishonoured, the plaintiff raised the action HCA2441/2003.  Mr Lok of CSI threatened him that unless he issued four personal cheques as interim security, CSI would proceed with the action and wind up CIL.

17. If this is right, Mr Lok was doing no more than threatening to carry out something which was within CSI’s rights, namely to sue for outstanding licence fees.  This is not normally duress.  See China Overseas Building Construction Ltd v. Profit Nation Development Ltd, HCA2008/2003.

18. No doubt CIL would find payment difficult, since it had apparently just had a debt-restructuring scheme approved.  It is argued that CSI knew about the scheme, and to proceed would have thrown it out, so CIL was particularly vulnerable.  That may be so, but in my view, it was not CSI’s problem.  It had the right to sue for its licence fees and I do not see that to do so could be regarded as duress.  It follows that there is nothing in this limb of the defence either.

Settlement

19. The major limb of the defence is the settlement.  Mr Ke’s case is that his liability in respect of the first two dishonoured cheques was discharged by the subsequent settlement between CSI and CIL; and that in respect of the second two cheques, which were dishonoured after that settlement was made, there has been a total failure of consideration.

20. I do not see that there is any question of failure of consideration.  The consideration for the cheques was the immediate discontinuance of the action HCA2114/2003.  That was done on the day the cheques were issued.  The situation is the same as that where goods are bought, and immediately delivered, against a post-dated cheque which is later dishonoured.

21. There remains, however, the question whether there is a triable issue on the terms of the agreement made between the parties in December 2003 as a result of which the promissory notes were issued; were these intended to discharge Mr Ke’s liability on the cheques, or not.  It is argued for CIL that there must necessarily be a triable issue on this point and further there is a triable issue as to whether the extra $500,000, representing the difference between the unpaid licence fees and the promissory notes is a consultancy fee or part of the settlement agreement.

Evidence

22. The promissory notes bear to be given in consideration of consultancy services and provision of office premises.  On the face of them, they make no reference to the cheques or any indebtedness on the part of Mr Ke.

23. In his 2^nd affirmation Mr Lok, CSI’s director, said that when the promissory notes were issued he made it clear that if the cheques were honoured, CSI would transfer back promissory notes of an equal amount, but CSI would in any event be responsible for $1.4 million, i.e. the total debt less the cheques.  He never agreed that Mr Ke would not be held responsible on the cheques.  In his 3^rd affirmation, Mr Lok said that the promissory notes were issued as guarantee for the sums to which CSI was all along entitled, i.e. $3,000,000.

24. Also in the 3^rd affirmation, Mr Lok exhibited the guarantees signed by Mr Ke and his co-director Mr Peter Ho.  He said that the two directors had promised to execute these deeds to guarantee payment in whole or in part of any licence fees which remained outstanding.  He says that the cheques were issued in part payment of the total outstanding.

25. Mr Ke’s evidence in his 1^st affirmation is that the agreement was that all the outstanding licence fees were to be settled by the promissory notes, and this extinguished his liability.  This is repeated in the 2^nd affirmation where he says that Mr Lok promised to return promissory notes to the value of any sums paid by CIL.  In this affirmation he brings in the allegations that the $500,000 difference between the licence fees and the promissory notes was a “sweetener”.

26. In his 3^rd affirmation Mr Ke repeats that the cheques were interim security, along with the guarantees, and that if the cheques were meant to be part settlement, CIL would not be required to issue promissory notes to a total of $3,000,000.

Discussion

27. The question of whether a defendant’s assertions are credible is to be viewed in the context of so much of the background as either undisputed or beyond reasonable dispute; see Re Safe Rich Industries Limited, 1994 HKLY 83.  In particular, that includes the contemporaneous documents.

28. The Deed of Guarantee is, it seems to me, of particular importance here.  It was executed on 17 July 2003, the same date on which the action was discontinued.  I have set out many of the terms of the Deed above.  In addition, by Clause 2, the guarantee was not to be considered as satisfied by any intermediate payment or satisfaction of “any part of the Debt or other monies owing” but was to be a continuing security and to cover any sum which would constitute the balance owing.  By Clause 3, the guarantee was to be in addition to, and not affected by, any collateral or other security then or thereafter held by CSI for any part of the debt or other monies guaranteed.  And by Clause 4, Mr Ke agreed to be liable as principal debtor.

29. Even if evidence to contradict the express terms of the cheques had been admissible, the Deed would have given the lie to it.  In no way could the cheques have been intended as a guarantee, in the face of the express recital of a covenant to “repay the Creditor the Debt by issuing four post-dated cheques”, copies of which were attached to the deed.

30. What is also particularly significant is that this Deed of Guarantee has never been discharged by any written document.  There is nothing in the promissory notes themselves to discharge it.  In the absence of any discharge, the liability of CIL on the cheques would co-exist with Mr Ke’s liability under the Deed as principal debtor.

31. CIL refers in particular to the letter to it from CSI’s solicitors, dated 10 March 2004.  This is basically a warning letter that, if CIL defaults on payment of any promissory note, CSI will sue.  It is true that the letter does not mention the cheques, or the liability of Mr Ke; but then it is also inaccurate in that it refers to the fact that HCA2114/2003 was “withheld at your request by making further assurance that you undertake to settle the entire outstanding sum of $3,000,000 by rendering to our client a total of 15 Promissory Notes…”.  In fact the action was discontinued on consideration of the issue of the cheques and no one had yet thought of promissory notes so it is difficult to see that this letter can have any value.

32. It is also true that the Deed of Guarantee only surfaced in the second round of affidavit evidence, when it was brought in to rebut the allegation that the cheques were issued as some kind of security, but I do not see that that lessens its effect.

33. The simple fact is that when the promissory notes were issued, CSI was in possession of the Deed under which Mr Ke was liable as principal debtor for $2,000,000, plus two dishonoured and two unpresented cheques.  One of the latter was due the day before, i.e. 30 November, and the other was due on 31 January 2004.  Up to that point, it cannot be denied that Mr Ke, having delivered the cheques to get the action discontinued, was liable on them; and as I understand it counsel for Mr Ke does not argue that he was not liable on them.  Further, I do not see how it could be argued that Mr Ke was not liable under the Deed.

34. If it had really been agreed that only CIL would continue to be liable to CSI, and Mr Ke’s existing liability would be discharged, it would have been open for the latter to ask for some written discharge of the deed and for the return of the unpresented cheques.  Indeed he would have been in a position to countermand the cheque which was not yet due.  Yet he did neither.

35. It would have made no sense on Mr Ke’s part to leave himself vulnerable in this way, if indeed the agreement he contends for had been made.  And while he may have sought in earlier affidavits to present himself as being of limited education (later contradicted by Mr Lok), the fact is that he was the chairman of a listed company and could be expected to know how to protect himself in financial matters.  It would however have made entire sense for CSI to keep open its options to go against Mr Ke or CIL, whichever it thought was good for the money it was owed.

36. When one looks at the allegations in the light of the documents, and what the parties did and did not do about them, it seems to me that the allegation that Mr Ke’s liability was extinguished by agreement is simply incredible.

37. As to the allegation that $500,000 of the debt represented part of the settlement agreement, rather than a consultancy fee, if that were true, Mr Ke would surely have said so right at the start, and not after the Master raised questions about it, especially given that the letter before action written by CSI’s solicitors, before the issue of HCA2114/2003 specifically claimed $2,500,000 as licence fees and $500,000 as a consultancy fee.  In my view this allegation is also incredible.

Result

38. It follows that the appeal must be and is dismissed with costs (nisi) to the plaintiff to be taxed if not agreed.